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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 2000
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-19651
Magainin Pharmaceuticals Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3445668
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
5110 Campus Drive
Plymouth Meeting, Pennsylvania 19462
(Address of principal executive offices) (ZIP Code)
610-941-4020
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [_]
The number of outstanding shares of the Registrant's Common Stock, par value
$.002 per share, on April 24, 2000 was 27,108,666.
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MAGAININ PHARMACEUTICALS INC.
INDEX TO FORM 10-Q
Page
----
Part I - Financial Information
Item 1. Financial Statements (unaudited)
Balance Sheets as of March 31, 2000 and December 31, 1999..... 2
Statements of Operations for the three months ended March 31,
2000 and March 31, 1999..................................... 3
Statements of Cash Flows for the three months ended March
31, 2000 and March 31, 1999................................. 4
Notes to Financial Statements................................. 5
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition..................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 18
Part II Other Information............................................. 19
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MAGAININ PHARMACEUTICALS INC.
BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
--------------- ------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 2,602 $ 2,435
Short-term investments (Note 3)................................................. 6,216 8,209
Prepaid expenses and other...................................................... 235 128
--------- ---------
Total current assets........................................................... 9,053 10,772
Fixed assets, net................................................................ 1,595 1,793
Other assets..................................................................... 166 166
--------- ---------
Total assets.................................................................. $ 10,814 $ 12,731
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........................................... $ 566 $ 664
Note payable (Note 3)........................................................... 2,500 2,500
--------- ---------
Total current liabilities...................................................... 3,066 3,164
Accrued development expense - long-term (Note 5)................................. 3,062 2,962
Deferred rent.................................................................... 51 53
--------- ---------
Total liabilities............................................................. 6,179 6,179
--------- ---------
Commitments, contingencies and other matters
Stockholders' equity (Note 4):
Preferred stock--$.001 par value; shares authorized--9,211; none issued.......... - -
Common stock--$.002 par value; shares authorized--45,000; shares issued
and outstanding--27,109 and 26,943, at March 31, 2000 and
December 31, 1999 respectively.................................................. 54 54
Additional paid-in capital....................................................... 152,149 151,655
Accumulated other comprehensive income--unrealized (loss) on investments......... 0 (13)
Accumulated deficit.............................................................. (147,568) (145,144)
--------- ---------
Total stockholders' equity..................................................... 4,635 6,552
--------- ---------
Total liabilities and stockholders' equity.................................... $ 10,814 $ 12,731
========= =========
</TABLE>
See accompanying notes to financial statements.
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MAGAININ PHARMACEUTICALS INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended
March 31,
------------------
2000 1999
------- -------
Revenues................................. $ - $ -
Costs and expenses:
Research and development................ 1,917 2,459
General and administrative.............. 495 862
------- -------
2,412 3,321
------- -------
Loss from operations..................... (2,412) (3,321)
Interest income.......................... 134 225
Interest expense......................... (146) (53)
------- -------
Net loss................................. $(2,424) $(3,149)
======= =======
Net loss per share--basic and diluted.... $(.09) $(0.14)
======= =======
Weighted average shares outstanding...... 26,996 22,912
======= =======
See accompanying notes to financial statements.
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MAGAININ PHARMACEUTICALS INC.
STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
2000 1999
------- -------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss.................................................................... $(2,424) $(3,149)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.............................................. 228 272
Amortization of investment discounts/premiums.............................. (94) (155)
Compensation expense under stock awards.................................... 48 66
Changes in operating assets and liabilities:
(Increase) in prepaid expenses and other assets............................ (107) (113)
(Decrease) in accounts payable and accrued expenses........................ (98) (989)
Increase in accrued development expenses - long-term....................... 100 -
(Decrease) in deferred rent................................................ (2) (14)
------- -------
Net cash used in operating activities........................................ (2,349) (4,082)
------- -------
Cash Flows From Investing Activities:
Purchase of investments..................................................... (4,650) (7,888)
Proceeds from maturities of investments..................................... 6,750 10,500
Capital expenditures........................................................ (30) (28)
------- -------
Net cash provided by investing activities.................................... 2,070 2,584
------- -------
Cash Flows From Financing Activities:
Net proceeds from sale of stock and exercise of options and warrants........ 446 -
------- -------
Net cash provided by financing activities.................................... 446 -
------- -------
Net increase (decrease) in cash and cash equivalents......................... 167 (1,498)
Cash and cash equivalents at beginning of period............................. 2,435 4,495
------- -------
Cash and cash equivalents at end of period................................... $ 2,602 $ 2,997
======= =======
Supplemental Cash Flow Information:
Cash paid during the period for interest..................................... $ 46 $ 50
======= =======
</TABLE>
See accompanying notes to financial statements.
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MAGAININ PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. The Company
Magainin Pharmaceuticals Inc. (the "Company") was incorporated on June 29,
1987. The Company is a biopharmaceutical company with research and development
efforts in anti-agniogenesis, respiratory genomics and infectious disease. The
Company is managed and operated as one business. The entire business is
comprehensively managed by a single management team that reports to the Chief
Executive Officer. Accordingly, the Company does not prepare discrete financial
information with respect to separate product areas or by location, and does not
have separately reportable segments as defined by SFAS No. 131.
2. Basis of Presentation
The accompanying financial statements are unaudited and have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). The December 31, 1999 balance sheet was derived from audited
financial statements, however, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to SEC
rules and regulations. The Company believes that the financial statements
include all adjustments of a normal and recurring nature necessary to present
fairly the results of operations, financial position, changes in stockholders'
equity and cash flows for the periods presented. Results of operations for
interim periods are not necessarily indicative of those to be achieved for full
fiscal years. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1999. There have been no material
changes in accounting policies from those stated in the Company's Annual Report
on Form 10-K for the year ended December 31, 1999.
3. Note Payable
The Company refinanced its $2,500,000 note payable in the second quarter of
1999. Under the terms of this arrangement, the Company makes monthly interest-
only payments at a rate of 7.375%, with principal due in June 2000. The Company
maintains investments of approximately $2,700,000 at the bank as collateral for
the note payable. The Company's current intention is to refinance this loan
prior to its maturity.
4. Stockholders' Equity
The changes in stockholders' equity from December 31, 1999 to March 31, 2000
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Total
----------------- Additional Compre- Stock-
Number Paid-in hensive Accumulated holders'
of Shares Amount Capital Income Deficit Equity
--------- ------ ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999..... 26,943 $54 $151,655 $(13) $(145,144) $ 6,552
Exercise of stock options, and
compensation expense under
stock and options awards....... 166 - 494 - - 494
Comprehensive loss
Net loss.................... - - - - (2,424) (2,424)
Carrying value adjustment... - - - 13 - 13
-------
Total comprehensive loss........ - - - - - (2,411)
--------- ------ ---------- ----------- ----------- -------
Balance at March 31, 2000........ 27,109 $54 $152,149 $ - $(147,568) $ 4,635
========= ====== ========== =========== =========== =======
</TABLE>
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5. Manufacturing Agreement
The Company renegotiated an earlier manufacturing agreement with Abbott
Laboratories in 1999. Under this agreement, $3,400,000 is due to Abbott and
payable if Magainin receives in excess of $10,000,000 of additional funds in any
year beginning in 2000, in which case 15% of such excess over $10,000,000 shall
be payable to Abbott. The Company has accrued $3,100,000 as the present value of
this conditional obligation as of March 31, 2000, assuming it would be payable
in full in early 2001. The Company has no further purchase commitments to
Abbott, and Abbott has no further supply requirements to Magainin.
6. Commitments, Contingencies and Other Matters
Liquidity
The Company has not generated any revenues from product sales, and has funded
operations primarily from the proceeds of public and private placements of
securities. Substantial additional financing will be required by the Company in
the near-term to fund its continuing research and development activities. No
assurance can be given that any such financing will be available when needed or
that the Company's research and development efforts will be successful.
As described in "Note 8, Subsequent Event", the Company entered into a
research, development and commercialization collaboration with Genentech, Inc.
("Genentech") under which the Company received $5,500,000 in May 2000. After
considering such investment, and in the absence of raising additional funds or
significantly reducing expenses, the Company has sufficient resources to sustain
operations through mid-2001. The Company regularly explores alternative means
of financing its operations and seeks funding through various sources, including
public and private securities offerings and collaborative arrangements with
third parties. The Company currently does not have any commitments to obtain
additional funds, and may be unable to obtain sufficient funding in the future
on acceptable terms. If the Company cannot obtain funding, it will need to
delay, scale back or eliminate research and development programs or enter into
collaborations with third parties to commercialize potential products or
technologies that it might otherwise seek to develop or commercialize
independently, or seek other arrangements. If the Company engages in
collaborations, it will receive lower consideration upon commercialization of
such products than if it had not entered into such arrangements, or if it
entered into such arrangements at later stages in the product development
process.
7. New Accounting Pronouncements
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements,
SAB 101. SAB 101 summarizes certain of the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements,
including the recognition of non-refundable fees received upon entering into
arrangements. The Company is in the process of evaluating SAB 101 and its
effects on our financial statements and current revenue recognition policies.
The Company is required to adopt this pronouncement no later then the second
quarter of 2000, with cumulative effect adjustments, if any, to be recorded as
of January 1, 2000.
8. Subsequent Event
In May 2000 the Company entered into a research, development and
commercialization collaboration with Genentech. Under this agreement, the
Company and Genentech will co-develop an antibody to IL9 for asthma, with
options for other products in respiratory disease.
The Company received $5,000,000 from Genentech, in exchange for the issuance
of common stock, and $500,000 representing the first issuance of convertible
preferred stock, redeemable under certain circumstances. The Company could
potentially receive up to $60,000,000 in milestone payments and development
funding for the first product. Additional products could generate additional
milestone payments and development funding. The Company will conduct development
activities through Phase II clinical testing, and Genentech will conduct Phase
III clinical testing, manufacturing and marketing. The Company may elect to co-
fund Genentech's Phase III clinical costs and
6
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regulatory costs in return for a share of U.S. profits and losses. The Company
will receive a royalty on sales overseas, and in the U.S. if the Company elects
not to fund the phase III and regulatory costs. Development funding will be
provided to the Company through the issuance of convertible preferred stock,
redeemable under certain circumstances.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RISK FACTORS RELATED TO OUR BUSINESS
Our disclosure and analysis in this report contains some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. Such statements may
include words such as "anticipate," "estimate," "expect," "project," "intend,"
"plan," "believe," and other words and terms of similar meaning in connection
with any discussion of future operating or financial performance. In particular,
these include statements relating to present or anticipated scientific progress,
development of potential pharmaceutical products, future revenues, capital
expenditures, research and development expenditures, future financing and
collaborations, personnel, manufacturing requirements and capabilities, and
other statements regarding matters that are not historical facts or statements
of current condition.
Any or all of our forward-looking statements in this report may turn out to be
wrong. They can be affected by inaccurate assumptions we might make, or by known
or unknown risks and uncertainties. Many factors mentioned in the discussion
below will be important in determining future results. Consequently, no forward-
looking statement can be guaranteed. Actual future results may vary materially.
We undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related subjects
in our filings with the SEC. Also note that we provide the following cautionary
discussion of risks and uncertainties relevant to our business. These are
factors that we think could cause our actual results to differ materially from
expected results. Other unanticipated occurrences besides those listed here
could also adversely affect us. This discussion is provided as permitted by the
Private Securities Litigation Reform Act of 1995.
If We Do Not Raise Additional Capital, We May Not Be Able to Continue Our
Research and Development Programs and May Never Commercialize Any Products.
We maintained cash and investments of $8,800,000 at March 31, 2000. At March
31, 2000, we had current liabilities of $3,100,000. As described in "Note 8" in
"Notes to Financial Statements", we entered into a research, development and
commercialization collaboration with Genentech, under which we received
$5,500,000 in May 2000. After considering such investment, and in the absence
of raising additional funds or significantly reducing expenses, we have
sufficient resources to sustain operations through mid-2001. We will need to
raise substantial additional funds in the future to continue our research and
development programs and to commercialize our potential products. If we are
unable to raise such funds, we may be unable to complete our development
activities for any of our proposed products.
We regularly explore alternative means of financing our operations and seek
funding through various sources, including public and private securities
offerings and collaborative arrangements with third parties. We currently do not
have any commitments to obtain additional funds, and may be unable to obtain
sufficient funding in the future on acceptable terms. If we cannot obtain
funding, we will need to delay, scale back or eliminate research and development
programs or enter into collaborations with third parties to commercialize
potential products or technologies that we might otherwise seek to develop or
commercialize ourselves, or seek other arrangements. If we engage in
collaborations, we will receive lower consideration upon commercialization of
such products than if we had not entered into such arrangements, or if we
entered into such arrangements at later stages in the product development
process.
We expect to evaluate all available strategic alternatives to finance our
programs and technology, including broad-based alliances or mergers intended to
create better-financed entities.
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We Expect to Continue to Incur Substantial Losses.
To date, we have engaged primarily in the research and development of drug
candidates. We have not generated any revenues from product sales and have
incurred losses in each year since our inception. As of March 31, 2000, we had
an accumulated deficit of approximately $147,600,000.
Our proposed products are in a relatively early developmental stage and will
require significant research, development and testing. We must obtain
regulatory approvals for all of our proposed products prior to commercialization
of the product. Our operations are also subject to various competitive and
regulatory risks. As a result, we are unable to predict when or if we will
achieve any product revenues. We expect to experience substantial losses in the
foreseeable future as we continue our research, development and testing efforts,
which will cause us to have continued negative results of operations.
The FDA Has Deemed Our New Drug Application, NDA, for LOCILEX(TM) Cream to Be
Not Approvable, Which Will Prevent Near Term Commercialization of the Product.
We announced on July 26, 1999 that we received notification from the U.S. Food
and Drug Administration, FDA, that our NDA for LOCILEX(TM) Cream had been
deemed not approvable.
LOCILEX(TM) Cream, a topical cream antibiotic for the treatment of infection
in diabetic foot ulcers, had been our lead product development candidate. We
had hoped to commercialize LOCILEX(TM) Cream in the near-term. However, with the
FDA's decision, near-term commercialization of LOCILEX(TM) Cream will not occur,
and we will generate no revenues from LOCILEX(TM) Cream in the near future.
In order to again seek approval of LOCILEX(TM) Cream, the FDA has indicated
that we must conduct further development activities, including clinical and
manufacturing activities. The specific nature of the clinical activities will
be determined after consultations with the FDA. As a result of its review of
manufacturing of the cream product, the FDA issued certain observations of
deficiencies in compliance with good manufacturing procedures. In any
additional clinical studies to be conducted, new batches of the cream product
will need to be manufactured from the bulk drug substance, in compliance with
good manufacturing procedures, and meeting strict product specifications.
Further clinical and manufacturing development efforts may again not be
successful. The time required to conduct such activities may be lengthy, and the
costs considerable.
If We Do Not Obtain Required Regulatory Approvals, We Will Not Be Able to
Commercialize Any of Our Product Candidates.
Numerous governmental authorities, including the FDA in the United States,
regulate our business and activities. Federal, state and foreign governmental
agencies impose rigorous preclinical and clinical testing and approval
requirements on our product candidates. In general, the process of obtaining
government approval is time consuming and costly.
Governmental authorities may delay or deny the approval of any of our drug
candidates. In addition, governmental authorities may enact new legislation or
regulations that could limit or restrict our efforts. A delay or denial of
regulatory approval for any of our drug candidates, such as that which has
occurred for LOCILEX(TM) Cream, will materially affect our business. Even if we
receive approval of a product candidate, it may be conditioned upon certain
limitations and restrictions as to the drugs used and may be subject to
continuous review. If we fail to comply with any applicable regulatory
requirements, we could be subject to penalties, including:
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. warning letters;
. fines;
. withdrawal of regulatory approval;
. product recalls;
. operating restrictions;
. injunctions; and
. criminal prosecution.
1. FDA Marketing Approval:
The primary regulatory agency overseeing all phases of our drug development
and marketing programs is the FDA. In order to obtain approval from the FDA to
market any drug, we must submit proof of safety, efficacy and quality for each
of our proposed products for each indication, which requires extensive and time
consuming preclinical and clinical testing. The results of preclinical studies
are submitted to the FDA as part of an Investigational New Drug Application or
IND. Once the IND is effective, human clinical trials may be conducted. The
results of the clinical trials are submitted to the FDA as part of a NDA.
Following review of the NDA, the FDA may:
. grant marketing approval;
. require additional testing or information; or
. deny the application.
2. FDA Manufacturing Approval:
Detailed manufacturing information is also required to be included in the NDA,
for review and approval by the FDA. All manufacturing facilities and processes
must comply with good manufacturing practices, or GMP, regulations prescribed by
the FDA. All manufacturers must, among other things, pass manufacturing plant
inspections and provide records of detailed manufacturing processes. Among other
things, it must be demonstrated that:
. the drug product can be consistently manufactured at the same quality
standard;
. the drug product is stable over time; and
. the level of chemical impurities in the drug product are under a
designated level.
3. Ongoing FDA Oversight:
We will continue to be subject to regulation by the FDA even after our drug
products have been approved and commercialized. Among other things, the FDA may:
. require additional submissions if there are any modifications to the drug
product including, for example, any changes in manufacturing process,
labeling, or manufacturing facility;
. require post-marketing testing and surveillance to monitor the effects of
approved drug products; and
. enforce conditional approvals that restrict the commercial applications of
a drug product.
Further, the FDA has numerous requirements governing labeling, promotional
material, storage, record keeping and reporting.
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The Prescription Drug User Fee Act of 1992 imposes substantial fees on a one-
time basis for applications for approval, and on an annual basis for
manufacturing and marketing of prescription drugs.
4. Other Regulatory Bodies:
We are also subject to regulation by other regulatory authorities, including
the Occupational Safety and Health Administration, the Environmental Protection
Agency, the Nuclear Regulatory Commission, the Drug Enforcement Agency and the
United States Department of Agriculture, and to regulation under the Toxic
Substances Control Act, the Resource Conservation and Recovery Act and other
regulatory statutes.
Drug product marketing outside the United States is subject to foreign
regulatory requirements which may or may not be influenced by FDA approval.
While the requirements vary widely from country to country, generally, the drug
product must be approved by a foreign regulatory authority comparable to the FDA
prior to marketing the product in those countries. The time required to obtain
foreign approvals may be longer than that in the United States.
In the future, we may be subject to additional federal, state or local
regulations or additional fees. Efforts are continually underway to reform
federal regulation of drug products. Although some of these changes could
streamline and otherwise benefit development, marketing and related requirements
for drugs, others could increase regulatory requirements.
We Will Rely on Marketing and Development Partners and if They Do Not Perform as
Expected, We May Not Successfully Commercialize Our Products.
We do not have our own sales and marketing staff. In order to successfully
develop and market our products, we must enter into marketing and distribution
arrangements with third parties. We also expect to delegate the responsibility
for all, or a significant portion, of the development and regulatory approval
for certain products to partners. If our partners do not develop an approvable
or marketable product or do not market a product successfully, we may not
achieve necessary product revenues. Additionally, we may be unable to enter into
other successful arrangements.
In May 2000 we announced the initiation of our asthma research, development
and commercialization collaboration with Genentech. Under this agreement,
Magainin and Genentech will co-develop an antibody to IL9 for asthma with
options for other products in respiratory disease. Genentech also became the
first subscriber to our Respiratory Gene Database. We will need partners in the
respiratory area to assist us with commercializing our technology, and we may be
unable to enter into similar agreements or find as effective a partner as
Genentech.
We also have a development, supply and distribution agreement with SmithKline
Beecham for LOCILEX(TM) Cream. Future milestone payments and sales proceeds from
SmithKline will occur only if LOCILEX(TM) Cream is eventually approved.
We do not have control over the amount and timing of resources to be devoted
to our products by our collaborative partners. In the future, the interests of
our collaborators may not be consistent with our interests. Collaborators may
develop products independently or through third parties that could compete with
our proposed products. For example, SmithKline maintains a significant presence
in the antibiotic area and currently sells a topical antibiotic product
indicated for the treatment of certain skin infections.
We may also decide to establish our own sales force to market and sell certain
products. Although certain members of our management have limited experience in
the marketing of pharmaceutical products, we have no experience with respect to
marketing our products. If we choose to pursue this alternative, we will need to
spend significant additional funds and devote significant management resources
and time to establish a successful sales force. Given our inexperience in
establishing and managing a salesforce, this effort may not be successful. Given
our financial resources, efforts in this area would likely be modest compared to
our competitors.
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If We Are Not Able to Innovate and Develop Products as Rapidly as Our
Competitors, Our Products May Not Achieve Market Acceptance.
The pharmaceutical industry is characterized by intense competition. Many
companies, research institutions and universities are conducting research and
development activities in a number of areas similar to our fields of interest.
We are aware that research on compounds derived from animal host-defense systems
is being conducted by others. Many companies are also currently involved in
research and development activities focused on the pathogenesis of disease, and
the competition among companies attempting to find genes responsible for disease
is intense. Most of these entities have substantially greater financial,
technical, manufacturing, marketing, distribution and other resources. We may
also face competition from companies using different or advanced techniques that
could render our products obsolete.
We expect technological developments in the biopharmaceutical field to occur
at a rapid rate and expect competition to intensify as advances in this field
are made. Accordingly, we must continue to devote substantial resources and
efforts to research and development activities in order to maintain a
competitive position in this field. Our compounds, products or processes may
become obsolete before we are able to recover a significant portion of our
research and development expenses. We will be competing with companies that have
significantly more experience in undertaking preclinical testing and human
clinical trials of new or improved therapeutic products and obtaining regulatory
approvals of such products. Some of these companies may be in advanced phases of
clinical testing of various drugs that may be competitive with our proposed
products.
Colleges, universities, governmental agencies and other public and private
research organizations are becoming more active in seeking patent protection and
licensing arrangements to collect royalties for use of technology that they have
developed, some of which may be directly competitive with our technology. In
addition, these institutions, along with pharmaceutical and specialized
biotechnology companies, can be expected to compete with us in recruiting highly
qualified scientific personnel.
Even if eventually approved, LOCILEX(TM) Cream may not be successfully
marketed against oral antibiotics for the treatment of infection in diabetic
foot ulcers. These infections have historically been treated with systemically
administered antibiotics, which may be perceived by some medical professionals
as having certain advantages over LOCILEX(TM) Cream. In addition, we may be
unable to manufacture LOCILEX(TM) Cream at a cost which will allow it to be sold
at a competitive price relative to oral antibiotics or other topical antibiotics
that may be used for this indication.
Many companies are working to develop and market products intended for the
additional disease areas being targeted by us, including cancer and asthma. A
number of major pharmaceutical companies have significant franchises in these
disease areas, and can be expected to invest heavily to protect their interests.
In the cancer field, anti-angiogenic agents are under development at a number of
companies. In the asthma field, other biopharmaceutical companies have also
reported the discovery of genes relating to asthma.
If We Do Not Develop and Maintain Relationships With Contract Manufacturers, We
May Not Successfully Commercialize Our Products.
1. Contract Manufacturing:
We currently have neither the resources, facilities, nor the technical
capabilities to manufacture any of our proposed products in the quantities and
quality required for commercial sale. We have no plans to establish a
manufacturing facility. We depend upon contract manufacturers for commercial
scale manufacturing of our proposed products in accordance with regulatory
standards. This dependence may restrict our ability to develop and deliver
products on a timely, profitable and competitive basis. Additionally, the number
of companies capable of producing our proposed products is limited. We may be
unable to maintain arrangements with qualified outside contractors to
manufacture materials at costs which are affordable to us, if at all.
Contract manufacturers may utilize their own technology, our technology, or
technology acquired or licensed from third parties in developing a manufacturing
process. In order to engage another manufacturer, we may need to obtain a
license or other technology transfer from the original contract manufacturer.
Even if a license is available from the original contract manufacturer on
acceptable terms, we may be unable to
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successfully effect the transfer of the technology to the new contract
manufacturer. Any such technology transfer may also require the transfer of
requisite data for regulatory purposes, including information contained in a
proprietary drug master file held by a contract manufacturer. If we rely on a
contract manufacturer that owns the drug master file, our ability to change
contract manufacturers may be more limited.
We had an agreement with Abbott Laboratories providing for the purchase of
approximately $10,000,000 of bulk drug substance for LOCILEX(TM) Cream. As FDA
approval of LOCILEX(TM) Cream did not occur, we renegotiated this agreement with
Abbott in 1999, paying Abbott $4,200,000 and receiving partial delivery of
material. An additional $3,400,000 million is due to Abbott and payable if we
receive in excess of $10,000,000 of additional funds in any year beginning in
2000, in which case 15% of such excess over $10,000,000 shall be payable to
Abbott. We have no further purchase commitments to Abbott, and Abbott has no
further supply requirements to us.
2. Alternative Production Processes:
The production of peptides, such as LOCILEX(TM) Cream and other magainin
peptides, is expensive relative to the production of traditional antibiotics. We
are pursuing alternative manufacturing sources, including recombinant
manufacturing, in order to improve the gross margins available to us on any
sales of these products. These programs, however, are at an early stage and will
require significant expenditures over an extended period of time. Ultimately, we
may be unable to develop a more cost-effective manufacturing process and, even
if we develop a more cost-effective process, the FDA may not approve such a
process.
We are also currently working with outside contractors for the chemical
production of squalamine. Production of squalamine and other proposed products
will also require significant expenditure.
3. Alternative Future Uses of LOCILEX(TM) Cream:
There are no currently identified alternative uses of bulk drug substance for
LOCILEX(TM) Cream.
We Depend on Our Intellectual Property, and If We Are Unable to Protect Our
Intellectual Property We May Not Realize Optimal Value from Our Technology.
1. Patents:
Our success depends, in part, on our ability to develop and maintain a strong
patent position for our products and technologies, both in the United States and
other countries. As with most biotechnology and pharmaceutical companies, our
patent position is highly uncertain and involves complex legal and factual
questions. Without patent and other protections, other companies could offer
substantially identical products for sale without incurring the sizeable
development and testing costs that we have incurred. Our ability to recoup these
expenditures and realize profits upon commercialization could be diminished.
We cannot be certain that:
. patents will issue from any of our patent applications;
. our patent rights will be sufficient to protect our technology;
. our patents will not be successfully challenged or circumvented by our
competitors; or
. our patent rights will provide us with any commercial advantages.
The process of obtaining patents can be time consuming and expensive. Even
after significant expenditure, a patent may not issue. We can never be certain
that we were the first to develop the technology or that we were the first to
file a patent application for the particular technology because U.S. patent
applications are maintained in secrecy until a patent issues and publications in
the scientific or patent literature lag behind actual discoveries.
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Even after we are issued patent rights, we cannot be certain that:
. others will not develop similar technologies or duplicate the technology;
. others will not design around the patented aspects of the technology;
. we will not be obliged to defend ourselves in court against allegations of
infringement of third-party patents;
. our issued patents will be held valid in court; or
. an adverse outcome in a suit would not subject us to significant
liabilities to third parties, require rights to be licensed from third
parties, or require us to cease using such technology.
The cost of litigation can be substantial, regardless of the outcome.
2. Potential Ownership Disputes:
There may be disputes arising as to the ownership of our technology. Most of
our research and development personnel previously worked at other biotechnology
companies, pharmaceutical companies, universities, or research institutions.
These entities may raise questions as to when technology was developed, and
assert rights to the technology. These kind of disputes have occurred in the
past. We may not prevail in any such disputes.
Similar technology ownership disputes may arise in the context of consultants,
vendors or third parties, such as contract manufacturers. For example, our
consultants are employed by or have consulting agreements with third parties.
There may be disputes as to the capacity in which consultants are operating when
they make certain discoveries. We may not prevail in any such disputes.
3. Other Intellectual Property:
In order to protect our proprietary technology and processes, we also rely on
trade secrets and confidentiality agreements with our corporate partners,
employees, consultants, outside scientific collaborators, and other advisors. We
may find that these agreements will be breached, or that our trade secrets have
otherwise become known or independently developed or discovered by our
competitors.
Certain of our exclusive rights to patents and patent applications are
governed by contract. Generally, such contracts require that we pay royalties on
sales of any products which are covered by patent claims. If we are unable to
pay the royalties we may lose our patent rights. Additionally, some of these
agreements also require that we develop the licensed technology under certain
timelines. If we do not adhere to an acceptable schedule of commercialization,
we may lose our rights.
If We Cannot Recruit and Retain Qualified Management, We May Not Be Able to
Successfully Develop and Commercialize Our Products.
We depend to a considerable degree on a limited number of key personnel. Many
key responsibilities have been assigned to a relatively small number of
individuals. We do not maintain "key man" insurance on any of our employees.
The loss of certain management and technical personnel could adversely affect
our ability to develop and commercialize products.
We are Subject to Potential Product Liability Claims, Which Could Result in
Significant Expense if a Claim Arose.
We are subject to significant potential product liability risks inherent in
the testing, manufacturing and marketing of human therapeutic products,
including the risk that:
. our proposed products cause some undesirable side effects or injury during
clinical trials;
. our products cause undesirable side effects or injury in the market; or
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. third parties that we have agreed to indemnify incur liability.
While we carry insurance, this coverage is expensive and we may be unable to
maintain adequate coverage on acceptable terms.
If We Do Not Receive Adequate Third-Party Reimbursement for Any of Our Drug
Candidates, Some Patients May Be Unable to Afford Our Products and Sales Could
Suffer.
In both the United States and elsewhere, the availability of reimbursement
from third-party payers, such as government health administration authorities,
private health insurers and other organizations, can impact prescription
pharmaceutical sales. These organizations are increasingly challenging the
prices charged for medical products and services, particularly where they
believe that there is only an incremental therapeutic benefit which does not
justify the additional cost. Coverage and reimbursement may not be available for
our proposed products, or, if available, may not be adequate. Without insurance
coverage, many patients may be unable to afford our products, and we may not
reach optimal sales levels.
There has also been a trend toward government reforms intended to contain or
reduce the cost of health care. In certain foreign markets, pricing or
profitability of prescription pharmaceuticals is subject to government control.
In the United States, there have been a number of federal and state proposals to
implement similar government control.
We expect this trend to continue, but we cannot predict the nature or extent
of any reform that results. It is possible that reform could impact
pharmaceutical marketing and pricing. Not only would this affect possible future
profit margins, it could adversely affect our ability to obtain financing for
the continued development of our proposed products. Furthermore, reforms could
have a broader impact by limiting overall growth of health care spending, such
as Medicare and Medicaid spending, which could also adversely effect our
business.
Our Stock Price Is Extremely Volatile Due to a Number of Factors.
The market prices and trading volumes for securities of biopharmaceutical and
biotechnology companies, including ours, have historically been, and will likely
continue to be, highly volatile. Future events affecting our business, or that
of our competitors, may significantly impact our stock price, including:
. product testing results,
. technological innovations,
. new commercial products,
. government regulations,
. proprietary rights,
. regulatory actions, and
. litigation.
We May Be Unable to Maintain the Standards for Listing on the Nasdaq National
Market, Which Could Make it More Difficult for Investors to Dispose of Our
Common Stock and Could Subject Our Common Stock to the "Penny Stock" Rules.
Our common stock is listed on the Nasdaq National Market. Nasdaq requires
listed companies to maintain standards for continued listing, including a
minimum bid price for shares of a company's stock and a minimum tangible net
worth. If we are unable to maintain these standards, our common stock could be
delisted. Trading in our stock would then be conducted on the Nasdaq Small Cap
Market unless we are unable to meet the requirements for inclusion therein. If
we were unable to meet the requirements for inclusion in the Small Cap Market,
our common stock would be traded on an electronic bulletin board established for
securities that do not meet the Nasdaq listing requirements or in quotations
published by the National Quotation Bureau, Inc. that are
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<PAGE>
commonly referred to as the "pink sheets." As a result, it could be more
difficult to sell, or obtain an accurate quotation as to the price of our common
stock.
In addition, if our common stock were delisted, it would be subject to the
so-called "penny stock" rules. The SEC has adopted regulations that define a
"penny stock" to be any equity security that has a market price of less than
$5.00 per share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules impose additional sales practice
requirements on broker-dealers, subject to certain exceptions.
For transactions covered by the penny stock rules, a broker-dealer must make a
special suitability determination for the purchaser and must have received the
purchaser's written consent to the transaction prior to the sale. The penny
stock rules also require broker-dealers to deliver monthly statements to penny
stock investors disclosing recent price information for the penny stock held in
the account, and information on the limited market in penny stocks. Prior to the
transaction, a broker-dealer must provide a disclosure schedule relating to the
penny stock market. In addition, the broker-dealer must disclose the following:
. commissions payable to the broker-dealer and the registered
representative; and
. current quotations for the security as mandated by the applicable
regulations.
If our common stock were delisted and determined to be a "penny stock," a
broker-dealer may find it to be more difficult to trade our common stock, and an
investor may find it more difficult to acquire or dispose of our common stock in
the secondary market.
The Exercise of Options and Warrants and Other Issuances of Shares Could Have A
Dilutive Effect on Our Stock Price.
As of March 31, 2000, there were outstanding options to purchase an aggregate
of 3,441,000 shares of our common stock at prices ranging from $0.40 per share
to $16.75 per share, of which approximately 2,111,000 were exercisable as of
such date. Also outstanding at March 31, 2000 were warrants to purchase 229,739
shares of our common stock exercisable at $8.00 per share, and warrants to
purchase an aggregate of 1,158,210 shares of our common stock, currently
exercisable from $5.35-$7.37 per share, and subject to adjustment with future
offerings. Exercise of options and warrants at prices below the market price of
our common stock could adversely affect the price of our common stock.
Additional dilution may result from the issuance of shares in connection with
collaborations or manufacturing arrangements, or in connection with other
financing efforts.
Our Certificate of Incorporation and Delaware Law Contain Provisions that Could
Discourage a Takeover.
Our certificate of incorporation provides our board of directors the power to
issue shares of preferred stock without stockholder approval. This preferred
stock could have voting rights, including voting rights that could be superior
to that of our common stock, and the board of directors has the power to
determine these voting rights. In addition, Section 203 of the Delaware General
Corporation Law contains provisions which impose restrictions on stockholder
action to acquire control of Magainin. The effect of these provisions of our
certificate of incorporation and Delaware law provisions would likely discourage
third parties from seeking to obtain control.
RESULTS OF OPERATIONS
Revenues
We have received no revenues from product sales. Revenues in prior periods
have consisted principally of revenues recognized under collaborations with
corporate partners. We have no currently existing collaborations that will
result in the realization of research and development revenues.
Research and Development Expenses
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Research and development expenses decreased in the first quarter of 2000 as
compared to the same period a year ago, due principally to reductions in
manufacturing development, clinical and regulatory costs, and personnel
expenses, principally due to decreased development activity relating to
LOCILEX(TM) Cream.
The level of research and development expenses in future periods will depend
principally upon the progress of our research and development programs and our
capital resources.
General and Administrative Expenses
General and administrative expenses consist principally of personnel costs and
professional fees and have decreased greatly in the first quarter of 2000 as
compared to the same period a year ago due principally to reductions in
personnel expenses and professional fees.
Other Income and Expense
Interest income decreased in the three months ended March 31, 2000 as compared
to the same period of the prior year due to lower investment balances. Interest
expense increased in the three months ended March 31, 2000 as compared to the
same period of the prior year due to interest expense associated with the long-
term obligation to Abbott Laboratories.
Net Loss
Our goal is to conduct significant research, pre-clinical development,
clinical testing and manufacturing activities over the next several years. We
expect that these activities, together with projected general and administrative
expenses, will result in continued and significant losses.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
Cash and investments were $8,818,000 at March 31, 2000 as compared to
$10,644,000 at December 31, 1999. The primary use of cash was to finance our
operations.
Since inception, we have funded our operations primarily from the proceeds of
public and private placements of securities, including:
. $17,080,000 raised from our initial public offering in December 1991;
. $21,469,000 raised from a public offering completed in February 1993;
. $18,023,000 raised from a private placement completed in October 1993;
. $32,627,000 raised from a public offering completed in August 1995;
. $11,932,000 raised from a private placement completed in August 1996;
. $19,172,000 raised from a public offering completed in December 1997;
. $ 2,000,000 raised from a private placement completed in December 1998; and
. $ 3,915,000 raised from a public offering completed in October 1999.
In addition to the above, we have funded our operations from contract and
grant revenues, interest income and lease and debt financing.
Accounts payable and accrued expenses decreased $98,000 to $566,000 at March
31, 2000. Long-term liabilities increased $100,000 to $3,062,000 reflecting the
present value of the additional amounts due to Abbott under certain conditions.
Under the terms of our $2,500,000 note payable, we make monthly interest-only
payments at a rate of 7.375%, with principal due in June 2000. We maintain
investments of $2,730,000 as collateral for the note payable.
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In December 1998, we entered into a collaborative research and option
agreement with Genentech relating to a protein therapeutic in asthma. Under this
agreement, we jointly conducted a collaborative program to evaluate the utility
of a blocking antibody to IL9 in suppressing the asthmatic response. Genentech
made an initial equity investment of $2,000,000 in our company in 1998, and had
an option to enter into a development and commercialization agreement with our
company. Under the terms of the option agreement, any such development and
commercialization agreement could provide for payments to us of up to
$35,000,000, and royalty payments on sales of products developed by Genentech in
the field. In May 2000 we announced the initiation of our asthma research,
development and commercialization collaboration with Genentech. See "Note 8" in
"Notes to Financial Statements."
We maintained cash and investments of $8,800,000 at March 31, 2000. At March
31, 2000, we had current liabilities of $3,100,000. As described in "Note 8" in
"Notes to Financial Statements", we entered into a research, development and
commercialization collaboration with Genentech, under which we received
$5,500,000 in May 2000. After considering such investment, and in the absence of
raising additional funds or significantly reducing expenses, we have sufficient
resources to sustain operations through mid-2001. We will need to raise
substantial additional funds in the future to continue our research and
development programs and to commercialize our potential products. If we are
unable to raise such funds, we may be unable to complete our development
activities for any of our proposed products.
We regularly explore alternative means of financing our operations and seek
funding through various sources, including public and private securities
offerings and collaborative arrangements with third parties. We currently do not
have any commitments to obtain additional funds, and may be unable to obtain
sufficient funding in the future on acceptable terms. If we cannot obtain
funding, we will need to delay, scale back or eliminate research and development
programs or enter into collaborations with third parties to commercialize
potential products or technologies that we might otherwise seek to develop or
commercialize ourselves, or seek other arrangements. If we engage in
collaborations, we will receive lower consideration upon commercialization of
such products than if we had not entered into such arrangements, or if we
entered into such arrangements at later stages in the product development
process.
Our capital expenditure requirements will depend upon numerous factors,
including the progress of our research and development programs, the time and
cost required to obtain regulatory approvals, our ability to enter into
additional collaborative arrangements, the demand for products based on our
technology, if and when such products are approved, and possible acquisitions of
products, technologies and companies. We had no significant capital commitments
as of March 31, 2000.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risk for changes in interest rates relates primarily to
the increase or decrease in the amount of interest income we can earn on our
available funds for investment. We do not currently have any significant direct
foreign currency exchange rate risk.
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PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
None
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
27 Financial Data Schedule
19
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Magainin Pharmaceuticals Inc.
(Registrant)
Date: May 11, 2000 /s/ Michael R. Dougherty
----------------------------------
Michael R. Dougherty
President, Chief Executive Officer
and Chief Financial Officer
20
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MAGAININ
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